A brief reading of Egypt's proposed state budget

Ziad Bahaa-Eldin
Wednesday 24 Jun 2015

The draft budget for the coming fiscal year suggests confusion rather than a clear economic vision

After a long wait, the cabinet has finally completed a draft budget for the coming fiscal year and sent it to the president for approval or amendment.

Under the proposed budget, state revenues will reach LE612 billion next year, an increase of 26 percent on the current year, and expenditures will rise 20 percent to LE885 billion.

The government is hoping that the shortfall of LE273 billion will come to less than 10 percent of GDP and is aiming for an economic growth rate of 5 percent, both extremely ambitious goals. The scarcity of information on the proposed budget, however, raises several observations and questions. 

First, aiming for a deficit of less than 10 percent of GDP reflects the government’s seriousness in addressing the structural budget imbalances. But this may have grave social consequences for the poor if the government does not wisely target its spending cuts.

A persistent problem, one faced by all Egyptian governments, is that just three items in the budget—government wages, debt service, and subsidies—account for 80 percent of total spending. And since debt service is non- negotiable (except in so far as interest rates decline), the government only has room to manoeuvre in wages and subsidies.

Remarkably, the proposed budget does not cut government wages; in fact they’re up 14 percent from the current year, consuming 26 percent of all public spending.

This is worrying because while the state has a duty to maintain workers’ rights, it must also pursue policies to rationalise wages and limit new public appointments.

This is a sensitive issue requiring a steady approach, but the continuation of the status quo denies the rest of society expanded investment and social spending. 

Second, the issue of energy subsidies requires additional clarification. According to press reports, the cost of these subsidies will drop from about LE100 billion to LE70 billion due to the decline in global petroleum prices. This is a good opportunity for Egypt. The question is whether the government will suffice with the savings offered by falling oil prices or will bump prices on gas, gasoline, and diesel.

This is the question on everyone’s mind as we near the end of the current fiscal year, especially in light of the sudden postponement of the implementation of the new fuel card system, which the state spent substantial sums to design and promote.

Third, and also on the spending side, the draft budget was presented as furthering social justice, in the form of billions of pounds allocated to various types of social spending.

Social spending is targeted at LE431 billion, or about half of total annual expenditures and an increase of 12 percent on current year according to the Ministry of Finance. But a 12-percent increase in social spending compared to an overall spending increase of 20 percent means that in fact social spending accounts relatively for less of the total budget than last year.

Moreover, we need to distinguish two types of social spending. The first kind targets the poorest Egyptians using surveys, data, and new programmes—for example, the new social pensions, the Karama and Takafful social insurance programs, bread subsidies using the new distribution system, and housing programs for low-income families.

The second kind is not targeted, meaning that it benefits the whole population, rich and poor alike, as is the case with education, health, and fuel. The problem is that targeted social spending is still just a fraction of general social expenditure. In turn, this means that state subsidies are still going to those who don’t need them.

Accordingly we don't just need increased social spending, but increased targeted assistance. Otherwise, social gaps will be further cemented even as resources continue to flow. 

Fourth, given that 80 percent of the budget goes to subsidies, debt service, and government wages, it is unclear how the state hopes to reduce the deficit while still pursuing national megaprojects whose costs, funding sources, and even economic viability remain vague.

This suggests that the political decision to move forward with these projects is utterly divorced from the budget submitted by the government. 

Fifth, the biggest riddle in the draft budget is how the state plans to increase revenues by 26 percent in one year, especially in light of the freeze on the capital gains tax on stock exchange transactions, the announced income tax reduction from 30 to 22.5 percent, and the uncertain status of the property tax.

Is the value-added tax (VAT) going to be the principal source of this revenue increase? Or are there plans to expand reconciliation measures for economic crimes? Or will state assets and public companies again be put on the auction block?

The substantial targeted increase in revenues requires an explanation, and whatever the answers, they all represent specific social and political choices which the public must understand and accept. 

Sixth, the ambitious targeted growth rate of 5 percent assumes that investment rates will far outstrip available state resources. As such, it will have to rely on increased investments by the private sector.

To achieve this, the state must reassess its investment policies, particularly considering the turmoil induced by the hasty issuance of a badly thought-out investment law and the ambiguity surrounding various tax laws issued over the last year.

Both of these put a dent in government credibility and made serious investors more hesitant about entering the Egyptian market until the economic direction is clearer. 

What I fear is a budget cobbled together from a set of random, unrelated ideas, an attempt to please everyone without setting forth a clearly marked path or vision. Such confusion will not reassure or attract investors, nor will it satisfy and serve the poor.

The budget has yet to be approved by the president, but it needs more than simply a revised number here and there. It must articulate a clearly defined direction and the social vision underlying it.

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